Pre-Qualification vs Pre-Approval: What’s the Difference?
If you’ve decided to ditch renting in favour of purchasing a home, it’s essential that you get familiar with the process, from start to finish. Right away, you’ll be bombarded with terms that may sound alien to you – and the onus will be on entirely on you to educate yourself on the lingo so that you have a solid idea of what buying your first home entails.
When conducting your initial research about acquiring a mortgage, you’re likely to read about pre-qualification and pre-approval. It’s crucial to understand what these terms mean, as they are the first steps in the mortgage approval process.
What is Pre-Qualification?
Before being approved for a mortgage, lenders will carefully look at your financial status, which means your income, assets, and debt. They will calculate your affordability using a number of financial metrics, namely TDS (total debt service ratio) and GDS (gross debt service ratio). You cannot be approved for a mortgage until you satisfy certain conditions that show you’ll be fully capable of making regular payments without any difficulty.
Overall, the process is quick and simple, and you’ll be provided with a tentative estimate on the amount the lender will be able to let you borrow. Little documentation is required, and you don’t have to fill out an application. Many financial institutions conduct these assessments over the phone or online, and often, at no cost. They also don’t affect your credit score.
What is Pre-Approval?
A pre-approval for a mortgage is when the lender makes an actual commitment to fund your mortgage based on your financial status.
At this stage, the lender will conduct a much deeper and rigorous analysis of your current financial standing. Your credit report will be assessed and you will have to fill out an official mortgage application.
The lender will also need to verify certain documents to satisfy the pre-approval requirements. You will you need to present personal identification, proof of income, bank account details, other debts you are liable for, personal assets, as well as confirmation of the down payment.
You will have the opportunity to negotiate an interest rate with the lender and be able to lock in this rate for a period of 60-120 days. Though a pre-approval is not a guarantee, as long as you abide by the terms of the contract, you are fully pre-approved for that time frame.
In addition, the lender will work with you to discuss your financial needs and help put together a mortgage plan. You’ll get a chance to discuss the various types of mortgages available (fixed vs, variable rate, closed vs open, amortization, etc.) and choose one that is most suitable for you. If you’re only thinking about purchasing a home, getting pre-qualified would suffice, as it will provide you with a general idea of what you can afford to borrow. When you make the leap and decide to purchase, it’s best to go through the pre-approval process, so that you have the conditional commitment from a lender, giving you the peace of mind knowing that you have secured financing for your future home.